In Depth: As China Sculpts New Patent Law, Division Persists on Innovation and Enforcement

Shen Changyu, director of the state intellectual property office, speaks to the media in the Great Hall of the People in Beijing on March 12. Photo: VCG

* Patent law experts say excessive involvement of administrative law enforcement in private patent disputes would lead to imbalanced competition in the market

* New measures to increase the penalties for patent infringement have also stirred controversy

(Beijing) — China’s legislature is expected to consider a draft of revisions to the country’s Patent Law in the next six months, according to people familiar with the matter. But divisions persist over its potential chilling effect on innovation, and the impact of giving enforcement powers to patent administrators, as well as beefed-up penalties.

The revision of the law began in November 2011 and, after multiple rounds of feedback, was finally approved by the State Council in December 2018. According to those who read the law during the public comment period in January and February this year, there is a general consensus that it should strengthen patent protection, but many disputes remain over specific provisions. Some clauses, such as those regarding penalty measures for patent infringement, are impractical.

“Revising the law is a big opportunity,” said Cheng Yongshun, director of the Beijing Intellectual Property Institute. “We should carefully study what has hindered our innovation and what direction we should develop in the future.”

Intentions for revisions

It took five years of drafting before China’s first patent law took effect on April 1, 1985. Named the “Patent Law” as tradition dictates, it has since been amended three times — in 1992, 2000 and 2008.

Experts such as Cheng — who was one of the first judges engaged in intellectual property trials in China — say that the first two amendments were primarily responses to external pressure to comply with international standards. The 2008 amendment, for example, focused on counterfeits and piracy. Since 2008, however, the motivation for amending the law has been to solve problems in domestic patent practices.

Looking at the numbers, Chinese companies appear to be growing more innovative. According to the World Intellectual Property Organization, China ranked first globally in the number of intellectual property applications for patents, trademarks and industrial designs in 2017.

But Shen Changyu, director of the State Intellectual Property Office (SIPO), told a press conference on Jan. 10 that the number of patent applications people take out does not reflect how many are actually authorized — nor their quality. “Take invention patents, for example. The number of applications in 2018 was close to 1.5 million, but the number granted remained between 400,000 and 550,000, roughly the same as in the United States. The criteria for authorization of intellectual property rights have not changed with the number of applications,” he said.

The most recent revision to the Patent Law comes after more than eight years of research and submissions. Zhang Yumin, honorary dean at the school of intellectual property law at Southwest University of Political Science and Law, said the revision originated from a need to adapt to China’s economic development — not from external pressure. Second, the Patent Law is closely related to the rapid development and technological progress of China’s economy as people are constantly putting forward new ideas.

The way Zhang sees it, the Patent Law is being revised because patent infringement is so common in China. And because under the current system, proving your patent has been violated is costly and time consuming, which frustrates companies’ impulse to innovate.

In 2014, China set up the Beijing intellectual property court to unify judgment standards and increase protection of intellectual property rights. Photo: IC

Systemic reform vs. legal amendments

Shen says that the new draft focuses on three points: first, strengthening the protection of legitimate rights and interests of patentees; second, promoting smoother implementation of patent applications; and third, turning proven practices into legal norms. For example, increasing the punishments for patent infringement will strengthen protections while also giving judicial protection a leading role.

To improve administrative enforcement, the draft adds provisions allowing the State Council’s patent administration department to handle disputes that may impact the whole country at the request of the patentee or stakeholder. The patent administration departments of local governments will handle disputes at the request of the patent-holder or stakeholder within its administrative region. In cases where the same patent is infringed in multiple regions, the patent-holder or stakeholder can request a higher level of the government to handle the case.

The draft also aims to give patent law enforcement authorities the means to deal with disputes, giving them the power to question parties involved in a dispute, conduct on-site inspections, consult and copy-related contracts, invoices, and accounts, and seize products related to suspected illegal activities if there is evidence that the products are counterfeit.

Under the current Patent Law, SIPO does not directly handle disputes. The new draft seeks to strengthen local governments’ patent administration departments and, for the first time, also gives enforcement powers to the national patent administration department.

However, this aspect of the draft law has aroused concern among academics.

“It’s natural for administrative departments to strengthen their management, but it is worth discussing whether strengthening the intellectual property administrative agencies’ direct enforcement of intellectual property rights is in line with the 2018 institutional reform objectives to separate intellectual property administrative power from enforcement power,” said Li Shunde, a researcher at the Law Institute of the Chinese Academy of Social Sciences.

For over 10 years, scholars such as Li have called for the separation of intellectual property administration and enforcement and have even submitted reform proposals. But their calls have fallen on deaf ears. It was not until March 2018, when the State Council launched a new round of institutional reform, that patent administration and enforcement powers were separated.

The reform plan adopted at the annual meeting of the National People’s Congress in March 2018 proposed that SIPO should be reorganized and administered by the State Administration for Market Supervision, integrating the responsibilities of a number of related offices under one umbrella. In a statement, State Councilor Wang Yong said that the main responsibilities of the reorganized SIPO are to protect intellectual property rights, promote the construction of an intellectual property protection system, register trademarks, patents, geographical indications of origin, and guide the enforcement of trademark and patent laws.

“The relationship is very delicate, but at least the functions of intellectual property management and administrative law enforcement are clearly separated,” Li said.

Administration expands and judiciary acquires rights

Under China’s current legislative framework, the protection of intellectual property rights is dominated by judicial protections and is supplemented by administrative protection. The new draft stipulates that the patent administration departments in county governments could take on the job of administrative law enforcement, drawing criticism from academics and the judicial world.

“The drafters were hoping for more enforcement power for patent administration bodies, using strengthened administrative enforcement as the main means for solving the weak protection of patent rights,” Cheng said. “But strengthening intellectual property protections involves many aspects, not necessarily just strengthening administrative protection.”

In March 2017, the Beijing Intellectual Property Court published research results on administrative enforcement of patents in China Intellectual Property magazine. The article said decentralizing the law enforcement power of patent departments does not take into account the fundamental characteristics of patent disputes, nor the ability of administrative organs to handle them. It also directly violates the spirit of the central government’s goal to “reduce levels of administrative law enforcement” and to “significantly reduce the types of law enforcement teams of municipal and county governments.”

“As a protection of civil rights, patent rights should be handled through judicial channels,” the article read. “The participation of administrative organs can only be an expedient choice in a specific historical period and under specific circumstances.”

The draft finally submitted to the legislature for consideration removed the provisions allowing county-level government patent administration departments to carry out administrative law enforcement. However, it strengthened the central patent administration’s law enforcement power in infringement cases. For the first time, it endowed SIPO with the power to enforce the law in specific infringement cases. Essentially, the law enforcement power of patent administrative departments is expanding.

Yang Zumin, a lawyer at Beijing law firm ZY Partners, told Caixin that if the draft is passed, SIPO will directly handle a large number of patent infringement disputes. “Because administrative law enforcement is faster than judicial procedures, I believe that rights holders will choose channels of administrative law enforcement to protect their rights,” he said. “However, whether or not the patent administrative enforcement powers will meet the public’s expectations remains to be seen.”

Academics, including Zhang Yumin, Li, and Cheng told Caixin that excessive involvement of administrative law enforcement in private patent disputes would lead to imbalanced competition in the market. Moreover, because the SIPO handles patent authorization and confirmation as well as patent infringement, it would be difficult for the office to remain neutral.

Jiang Liwei, a senior partner at the Beijing Liande Law Firm with 10 years of experience in intellectual property trials, said China’s patent trial system has been through a process of “centralization, expansion and re-centralization.” While intermediate courts originally heard patent cases, by 2009 some local courts could try certain patent cases. In 2014, Beijing, Shanghai and Guangzhou set up intellectual property courts in order to strengthen intellectual property rights. Now, most intermediate courts do not hear patent cases.

“SIPO now hopes to expand the power of administrative law enforcement,” Jiang said. “In order to better unify law enforcement standards, it must concentrate rather than expand the patent jurisdiction. On the other hand, it’s objectively difficult to establish a high-quality patent administrative law enforcement team.”

China’s Supreme People’s Court, the mainland’s highest court, established an Intellectual Property Court shortly after the draft amendment was submitted. According to the pilot scheme approved by the central government, appeals hearings of certain civil and administrative cases should be centralized and held in the Supreme Court’s Intellectual Property Court.

On Jan. 8, the court held a consultation meeting with experts. According to scholars who attended the meeting, the judges on the Supreme Court were clearly opposed to the expansion of administrative power. “They felt that the centralization of patent jurisdictions was clearly more in line with the reform direction of the central government,” one scholar, who wished to remain anonymous because it was a closed-door meeting, told Caixin.

China led the world in intellectual property applications for patents, trademarks and industrial designs in 2017, according to the world intellectual property index’s annual report. Photo: VCG

Punitive damages

Beyond the clause expanding SIPO’s administrative powers, new measures to increase the penalties for patent infringement have also stirred controversy.

Patentees have long complained that lawsuits rarely compensate them even if they win, and this has resulted in a low willingness to defend one’s rights through judicial channels. The draft amendment follows the provisions of the Trademark Law by introducing a punitive damages system and reducing the burden of proof of the patentee.

The draft amendment adds that, in serious cases, the value of compensation can be determined based on the rights holder’s losses, the profits of the infringer, or one to five times the royalties of the patent license. If the compensation amount is difficult to calculate, the court can determine to increase it by 100,000 yuan to 5 million yuan, up from 10,000 yuan to 1 million yuan in the current law. The draft also allows the court, in certain cases, to order the alleged infringer to provide account books and information related to the infringement. If they do not provide this information the court may rely on the evidence provided by the rights holder and order a fixed sum of compensation.

Yang believes that introducing a punitive damages system can deter infringement, reduce the burden of proof needed for damages, make it possible to obtain a higher amount of compensation, and enhance deterrence.

However, the maximum compensation standard of five times the damage caused exceeds the global norm. Li Yang, a professor at Sun Yat-sen University in Guangzhou, said that charging one to five times the punitive damages would devastate the perpetrators of patent infringement. “Where did five times come from? Before the highest compensation was three times that of the punitive damages, like in the United States,” he said. “Is this beefed up level of protection reasonable?”

Cheng worried that the meaning of “intentional infringement of patent rights” may be too vague. “Patent and trademark rights are different,” he said. “Today, all technological innovations and inventions have a long shadow of predecessors, so it’s difficult to judge whether the infringements are intentional or not.”

“Intentional infringement involves intentionally imitating something already patented, but what if it is to intentionally improve the patented technology? As a result, those who made the improvements see no infringement, but whether it constitutes infringement is decided by a judge,” he said. Different judges and different levels of the courts will have different conclusions — and a decision to impose five times the punitive damages on the infringer could be disastrous. “The consequences are unimaginable. Innovation may even take a blow,” he said.

Follow-up on research and development on the basis of others’ patents is a conventional means for technological innovation, research and development, one judge who wished to remain anonymous told Caixin. Developers usually upgrade or replace their R&D when they know other people’s patented technology schemes, he said. If an accused infringer bears excessive damages, it will have a negative impact on incentives to innovate.

Unresolved problems

Improving the efficiency of patent authorizations and reducing the waste of administrative and judicial resources has long been a problem that the industry hopes to solve, but the current draft amendment does not address these issues, experts say.

One of the major restrictions for judicial protection of intellectual property rights is the long litigation cycle. In patent litigation, once the plaintiff initiates an infringement lawsuit, the defendant will often file an invalid patent application with the Patent Re-examination Board, causing the court to suspend the trial until the board makes their decision. Even after a decision is announced, the defendant has the right to continue to bring administrative proceedings to the court. The court case can only resume when the administrative litigation procedure determining the validity of the patent has finished. This may take multiple hearing.

According to Li Yang, academics and judicial practice suggest the patent review procedure should be treated as a civil or administrative procedure. If the parties refuse to accept the decision of the review board, they should directly appeal for a second hearing, simplifying the process, reducing litigation time, and speeding up its efficiency. Many have also suggested that the court should be empowered to determine whether a patent is valid in the case of infringement, separately from the patent review authority’s right to examine a patent’s validity.

Indirect infringement, which is to some extent an expansion of the rights of patentees, has also been mentioned. “A simple example, patent protection is like a cup with a lid. Companies A and B say great, and company A makes the cup lid, company B makes the cup body, and the two do not infringe on each other,” Cheng Yongshun said. “But then a third party, company C, sells the cups. If C sells them together, the sale constitutes an infringement of patent rights. So do the behaviors of A and B constitute infringement? According to current regulations, it does not, but in real life this kind of thing is very common, so stipulating the indirect infringement system is an obvious measure to strengthen patent rights protection.”

Some scholars have indicated that the Legal Committee of the Standing Committee of the National People’s Congress may submit the draft for consideration in the first half of 2019. The second review of the draft will continue to solicit opinions.

Liu Xiucai, an entrepreneur whose company was hit with a patent infringement suit, says the significance of intellectual property protection is not in doubt, but many people still do not understand the value of innovation. He thinks that intellectual property is a tool to suppress competition. “In addition to legislation, we should also strengthen education and discussion of intellectual property protection,” he said. “This is the fundamental way to solve the problem.”